Scribd
Upload
79 views2 pages

EC3314 Spring PS 1

This document contains practice problems related to financial economics. It includes questions about distinguishing between different types of bonds, calculating yields to maturity, bond prices, and holding period returns. Specifically, it asks the student to: 1) Define foreign bonds, Eurobonds, and different types of bonds from different countries. 2) Explain what a junk bond is and why they are attractive. 3) Interpret credit ratings based on a firm's Z-score. 4) Convert between basis points and percentage points in interest rates. 5) Calculate yields to maturity and bond prices in various scenarios. 6) Determine holding period returns on bonds over 1-year horizons. 7) Use Excel and manual calculations

Uploaded by

christina0107
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
79 views2 pages

EC3314 Spring PS 1

This document contains practice problems related to financial economics. It includes questions about distinguishing between different types of bonds, calculating yields to maturity, bond prices, and holding period returns. Specifically, it asks the student to: 1) Define foreign bonds, Eurobonds, and different types of bonds from different countries. 2) Explain what a junk bond is and why they are attractive. 3) Interpret credit ratings based on a firm's Z-score. 4) Convert between basis points and percentage points in interest rates. 5) Calculate yields to maturity and bond prices in various scenarios. 6) Determine holding period returns on bonds over 1-year horizons. 7) Use Excel and manual calculations

Uploaded by

christina0107
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

EC3314 Financial Economics Spring 2015

Vinay Nundlall
Spring Problem Set 1
Preliminary:
Read the supplementary notes on Discounting, Net Present Value and
Annuity.
Question 1
a) Distinguish between a Foreign Bond and a Eurobond.
What are the following in the Bond Market:
Bulldog, Samurai, Maple, Yankee, Matilda?
Sushi?
Dim Sum?
b) What is a junk bond? What is so attractive with junk bonds?
c) In discriminant analysis, what type of ratings would credit rating
agencies give to a firm that has a Z-Score that lies well below the cutoff score? And if the Z-Score lies well above the cut-off?
d) What is a basis point in interest rates? Write 2.13% in basis points.
Convert 0.0058 in percentage points.
Question 2
a) A bond that does not pay any coupons will mature in one year. It has
a par value of $100. If it is currently selling at a price of $90.91, what
is the YTM on this bond? Round your answer to the nearest basis point.
b) A bond that pays a yearly coupon of $25 and has face value of
$1,000 will mature in a year. If that bond is currently quoted at 99: 5/32 ,
obtain the YTM of the bond, rounding your answer to the nearest basis
point.
Question 3
A bond pays a coupon rate of 10% per year semi-annually when the
market interest rate is 8% per year. The bond has 3 years until
maturity and par value is $1,000. (Round your answers to the nearest
basis point.)
a) Find the bonds price today.
b) Find the bonds price 6 months later after the next coupon is paid.
c) Find the 6 months rate of return on the bond.

d) If todays price is 990, and we do not know the current market


interest rate, find the YTM of the bond.
Question For Further Practice
You have an investment horizon of 1 year. You can choose between 3
bonds that have similar default risk, similar par value and all mature
in 10 years.
Bond 1 is a zero-coupon bond that pays $1,000 at maturity.
Bond 2 has an 8% coupon rate and pays coupons once a year.
Bond 3 has a 10% coupon rate and pays coupons once a year.
(Round your answers to the nearest basis point.)
a) If all three bonds are priced to yield 8% to maturity, what are their
prices?
b) If YTM at beginning of next year is 8%, what will the prices be at
that time?
c) What will your holding period return be on each bond?
Please use both Excel and manual methods to make sure that you
know how to use the appropriate methods in answering these
questions.

You might also like